Stimulating the Stimulus—child credit and EITC

The stimulus bill working its way through Congress would make both the child tax credit (CTC) and the earned income tax credit (EITC) available to more low-income workers. The CTC would phase in at lower income levels for the poorest working families, raising after-tax income for the neediest and most likely encouraging them to spend additional income. The EITC would increase for larger families, also giving more cash to families likely to spend quickly.

Both proposals would deliver substantial bang-for-the-buck quickly if families get the additional income right away. But in general, they can’t or won’t. Few would see any benefit until they file their 2009 tax returns in 2010. That’s a slow stimulus.

Yes, workers can have their employers add advanced EITC payments to their paychecks to get immediate benefit. But less than 2 percent of recipients choose that option. Most either like the idea of a big tax refund in April or fear having to pay back overpayments.

Both credits could arrive faster if the IRS could allow 2009 credits based on 2008 tax returns. It did that successfully with the 2008 tax rebates: Congress created the rebates in January and the IRS delivered most payments by the summer.

And, sure, advancing the credits would complicate 2009 tax returns—the IRS reports lots of questions about last year’s rebates as taxpayers work on their 2008 returns. Some families that wouldn’t qualify in 2009 would get the credit based on 2008 income and other families would have to wait until 2010. But we know this overall approach can work because it did last year.

The biggest tax provision in the stimulus provisions bill is the Making Work Pay credit, which would show up quickly in paychecks for all but the poorest workers (who have little or no withholding to reduce) and the rich (who are ineligible). Speeding up payment of the additional CTC and EITC benefits would quickly help the families most in need and most likely to spend.

3Comments

Anonymous :: 3:23 pm on February 5th, 2009:

Make the EITC and CTC credits big enough and people will apply for advanced withholding. They could be safely doubled and we would still need stimulus.
I am in favor of a tax reform which would include a Value Added Tax, an expansion of the business income tax to include all types of firms (including partnerships and sole proprietorships) and make wage and salary costs taxable. The EITC, CTC and most other popular credits would be taken against the business income tax (which would also include non-retirement payroll taxes – with survivors insurance for retired workers considered a part of the retirement protion – as well as any increased levies and offsetting credits enacted as part of health care reform).
Personal income taxes would be simplified with a $100,000 floor for individuals and no family aggregation (so a couple making $50,000 and $75,000 would not get caught – nor would the spouse of someone making $120,000). Personal income tax rates would also be cut by the percentage of income attributable to the VAT and BIT. Assuming a 10% VAT and a 15% BIT, the 28% tax rate would become 3% on all income from $100,000 to the 31% rate (now 6%). The highest rate would be a 15% levy on income over $250,000 (including all cash payments and withdrawls from inheritence with the exception of the sale of assets to broad based employee ownership plans).
The impact of the change in taxation would be an increase in the perception of tax payment, along with perceptably higher incomes at the lower end of the scale (depending upon how much CTC and EITC credits were increased – I would go as high as 6 times the current level on the CTC and include provisions for doubling the minimum wage so no one is paid solely through their CTC credit). Firms might trim higher level salaries, as well as everyone's base and nominal salary levels – especially to the extent that payroll taxes are no longer withheld from individuals.
This may or may not decrease the pool of money available for savings. It is interesting to note this week that savings are up, while deposits are down. People are hiding the money under the mattress or keeping more cash on hand. There is one sure way to reverse this trend – allow interest rates to increase. Lower interest rates may make it cheaper for banks to borrow – however they won't lend without deposits and deposits won't be made unless they carry some return with them.
Making refinancing cheaper won't work without the banks having some cash to actually lend. The Fed needs to increase rates so cash becomes available.

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